Problem

Oerstman, Inc., uses a standard costing system and develops its overhead rates from the current annual budget. The budget is based on an expected annual output of 120,000 units requiring 480,000 direct labor hours. (Practical capacity is 500.000 hours.) Annual budgeted overhead costs total $787, 200, of which $556, 800 is fixed overhead. A total of 119, 400 units using 478,000 direct labor hours were produced during the year. Actual variable overhead costs for the year were $230, 600, and actual fixed overhead costs were $556, 250.

Required:

1. Compute the fixed overhead spending and volume variances. How would you interpret the spending variance? Discuss the possible interpretations of the volume variance. Which most appropriate for this example?

2. Compute the variable overhead spending and efficiency variances. How is the variable over-bead spending variance like the price variances of direct labor and direct materials? How is it different? How is the variable overhead efficiency variance related to the labor efficiency variance?